IRA for my daughter

Discussion in 'Financial Planning' started by Kaspa, Nov 11, 2010.

  1. Kaspa

    Kaspa Guest

    Our 18 year old daughter started working as an intern this year, while
    studying in college, and is expected to earn about $6,000-8,000/year.
    This is definitely great as it partially offsets her college expenses
    (about $25,000/year), that we are paying. However, this also
    increases our family income and I would like to see if we can reduce
    the tax hit. I am sure this is a common occurrence and hope the
    knowledgeable folks here can guide me, as my knowledge of these tax
    issues is very limited.

    1. We filed as married joint for 2009, with my daughter as a
    dependent. Will that still work for 2010, now that she has a
    substantial income?
    2. We are not eligible to contribute to ROTH because of our high
    income as a family. If my daughter opens a ROTH, does she need to
    file a separate tax return? In that case, I believe I cannot claim
    her as a dependent.
    3. If we are paying for her college education, is this considered as
    some kind of gift which is taxed?

    Thank you for all your help.

    Kaspa
     
    Kaspa, Nov 11, 2010
    #1
    1. Advertisements

  2. Kaspa

    dapperdobbs Guest

    On Nov 11, 5:16 am, Kaspa <> wrote:
    > Our 18 year old daughter started working as an intern this year <...>


    My understanding in general is that a dependent is someone who relies
    on you for the majority of their support, e.g. for housing, food,
    clothing, etc.. The $25k outweighs the $8k, and eighteen years old
    going to college ...? She's dependent on you.

    Paying college costs is not considered a gift that I know of. The
    specifics are worded much more elegantly as I recall, but my
    understanding is that anyone can pay for anyone's college, and it is
    not considered a gift for tax purposes.

    Whenever possible, refer to the IRS instructions. On this subject,
    they are not hard to read, and you can ask the IRS anonymously for
    specific instructions you are unable to find on their site. Sometimes
    even paid professionals (not me)get things wrong, so it's a good idea
    to read on your own.

    Who must file? is a start:
    http://www.irs.gov/individuals/article/0,,id=96623,00.html

    IRA (go to publication 590)
    http://www.irs.gov/taxtopics/tc451.html

    dependents (surprisingly clear and concise)
    http://www.irs.gov/newsroom/article/0,,id=202335,00.html

    "1. If someone else claims you as a dependent, you may still be
    required to file your own tax return. Whether or not you must file a
    return depends on several factors, including the amount of your
    unearned, earned or gross income, your marital status, any special
    taxes you owe and, any advance Earned Income Tax Credit payments you
    received."
     
    dapperdobbs, Nov 11, 2010
    #2
    1. Advertisements

  3. Kaspa <> writes:

    > Our 18 year old daughter started working as an intern this year, while
    > studying in college, and is expected to earn about $6,000-8,000/year.
    > This is definitely great as it partially offsets her college expenses
    > (about $25,000/year), that we are paying. However, this also
    > increases our family income and I would like to see if we can reduce
    > the tax hit. I am sure this is a common occurrence and hope the
    > knowledgeable folks here can guide me, as my knowledge of these tax
    > issues is very limited.


    One important thing up-front...

    You appear to have a serious misconception that someone cannot be
    claimed as a dependent if they file their own tax return.

    That is not the case.

    Further, once your daughter turned 14 her income no longer[*] shows up
    on your joint return -- even if you wanted it to. In fact, if she had
    enough income that it has to be accounted for on a tax return she must
    file her own return once she's 14.

    And $6000-$8000 of W-2 income means that she will have to file her own
    tax return. She will have to do so whether or not she is eligible to
    be claimed as a dependent.

    [*] With the extension of the kiddie tax rules to cover young adults
    the tax RATE on some of her income may be derived from your return,
    but none of her income will show up on your return.

    > 2. We are not eligible to contribute to ROTH because of our high
    > income as a family. If my daughter opens a ROTH, does she need to
    > file a separate tax return? In that case, I believe I cannot claim
    > her as a dependent.


    >From what you've said about her income she needs to file

    her own return no matter what. As I noted above, the act
    of filing her own return does not affect whether or not you
    can claim her as a dependent. See Pub 17 or the Form 1040
    instructions for the tests to see if she is an eligible
    dependent.

    > 3. If we are paying for her college education, is this considered as
    > some kind of gift which is taxed?


    If the tuition payments are made directly to the school they
    are exempt from the whole gift tax scheme (don't even have to
    be reported on a gift tax return).
     
    Rich Carreiro, Nov 11, 2010
    #3
  4. On Nov 11, 5:16 am, Kaspa <> wrote:
    > 1. We filed as married joint for 2009, with my daughter as a
    > dependent.  Will that still work for 2010, now that she has a
    > substantial income?


    Yes.

    > 2. We are not eligible to contribute to ROTH because of our high
    > income as a family.  If my daughter opens a ROTH, does she need to
    > file a separate tax return?  In that case, I believe I cannot claim
    > her as a dependent.


    Most likely, your daughter will have to file a return no matter what.
    In 2009, Dependents must file a return if they had earned income >
    $5,700 (see 1040 instructions). However, you can still claim her as a
    dependent.

    > 3. If we are paying for her college education, is this considered as
    > some kind of gift which is taxed?


    No. Quite the opposite, you may be to realize some tax benefits for
    paying her tuition. There are 3 different credits for higher
    education expenses. And if you don't qualify for any of those, you
    still may be able to deduct tuition and fees. Any decent tax software
    will work out all the possibilities and tell you the best choice.

    --Bill
     
    Bill Woessner, Nov 11, 2010
    #4
  5. Kaspa

    Dave Dodson Guest

    On Nov 11, 4:16 am, Kaspa <> wrote:
    > 2. ...  If my daughter opens a ROTH, does she need to
    > file a separate tax return?  In that case, I believe I cannot claim
    > her as a dependent.


    You've received good advice about everything but opening a Roth IRA
    for your daughter. Since she has earned income, she will be eligible
    to open a Roth in her own name. If she is the responsible type, who
    wouldn't take the money out early, this could be a great start to her
    retirement savings. For example, if she contributed $5,000 to a Roth
    IRA and it earned 5% over inflation for 50 years, the result would be
    the equivalent of $160,000 of today's dollars, tax free, when she
    turns 68. Depending on her standard of living, that one contribution
    could fund two to four years of her retirement!

    Dave
     
    Dave Dodson, Nov 11, 2010
    #5
  6. Kaspa

    jIM Guest

    On Nov 11, 5:16 am, Kaspa <> wrote:
    > Our 18 year old daughter started working as an intern this year, while
    > studying in college, and is expected to earn about $6,000-8,000/year.
    > This is definitely great as it partially offsets her college expenses
    > (about $25,000/year), that we are paying.  However, this also
    > increases our family income and I would like to see if we can reduce
    > the tax hit.  I am sure this is a common occurrence and hope the
    > knowledgeable folks here can guide me, as my knowledge of these tax
    > issues is very limited.
    >
    > 1. We filed as married joint for 2009, with my daughter as a
    > dependent.  Will that still work for 2010, now that she has a
    > substantial income?
    > 2. We are not eligible to contribute to ROTH because of our high
    > income as a family.  If my daughter opens a ROTH, does she need to
    > file a separate tax return?  In that case, I believe I cannot claim
    > her as a dependent.
    > 3. If we are paying for her college education, is this considered as
    > some kind of gift which is taxed?
    >
    > Thank you for all your help.
    >
    > Kaspa


    1) Your filing status has no impact on whether child is a dependant or
    files a return

    a) child is a dependent if they meet the dependency tests (someone
    else provided more than half her support, related to you, not a
    qualifying child of someone else...)
    b) child must file a tax return based on income- if income is more
    than ($3650??) she must file a tax return. Even if income is LESS
    than $3650 she could still file a return if she wanted to claim a
    refund of taxes paid, BUT she is not REQUIRED to file a tax return
    until income hits a certain level (two different tests here, one for
    earned income, and one for unearned income). She meets the earned
    income test therefore she needs to file.

    2) Check the rules for a Roth. I believe the requirement is a valid
    SS and earned income. There are income limits for filing as single.
    If you wanted to reduce tax hit, consider a traditional IRA and she
    can tax a tax deduction, but I also think her tax bracket is 10%, so
    Roth is a good bet (her tax bracket goes up from here).

    3) college education expenses are part of support (see dependency
    issue and support test for #1). You may or may not be able to claim
    the college expenses as a tax deduction or tax credit. The college
    expenses follow the dependency (if you claim the dependency, only YOU
    can claim the tax credits, if daughter claims dependency, she can
    claim the college tax credits).

    Focus on the dependency first- that will change the tax situation
    most. Many things follow the dependency (tax credits and similar).

    For example, if daughter claimed her dependency, she might also claim
    the EIC if her income is low enough (higher refund). But she needs to
    meet the dependency tests to know if she can claim her own exemption.
     
    jIM, Nov 11, 2010
    #6
  7. Kaspa

    Abid Khan Guest

    On Nov 11, 4:16 am, Kaspa <> wrote:
    > Our 18 year old daughter started working as an intern this year, while
    > studying in college, and is expected to earn about $6,000-8,000/year.
    > This is definitely great as it partially offsets her college expenses
    > (about $25,000/year), that we are paying.  However, this also
    > increases our family income and I would like to see if we can reduce
    > the tax hit.  I am sure this is a common occurrence and hope the
    > knowledgeable folks here can guide me, as my knowledge of these tax
    > issues is very limited.
    >
    > 1. We filed as married joint for 2009, with my daughter as a
    > dependent.  Will that still work for 2010, now that she has a
    > substantial income?
    > 2. We are not eligible to contribute to ROTH because of our high
    > income as a family.  If my daughter opens a ROTH, does she need to
    > file a separate tax return?  In that case, I believe I cannot claim
    > her as a dependent.
    > 3. If we are paying for her college education, is this considered as
    > some kind of gift which is taxed?
    >
    > Thank you for all your help.
    >
    > Kaspa


    Very good posting, I am sorry I don't have anything to add here, I
    learned a lot since I am going to be in the similar situation soon.
    Thanks for your post.

    Abid
     
    Abid Khan, Nov 12, 2010
    #7
  8. Kaspa

    kaspa Guest

    On Nov 11, 2:16 am, Kaspa <> wrote:
    > Our 18 year old daughter started working as an intern this year, while
    > studying in college, and is expected to earn about $6,000-8,000/year.
    > This is definitely great as it partially offsets her college expenses
    > (about $25,000/year), that we are paying.  However, this also
    > increases our family income and I would like to see if we can reduce
    > the tax hit.  I am sure this is a common occurrence and hope the
    > knowledgeable folks here can guide me, as my knowledge of these tax
    > issues is very limited.
    >
    > 1. We filed as married joint for 2009, with my daughter as a
    > dependent.  Will that still work for 2010, now that she has a
    > substantial income?
    > 2. We are not eligible to contribute to ROTH because of our high
    > income as a family.  If my daughter opens a ROTH, does she need to
    > file a separate tax return?  In that case, I believe I cannot claim
    > her as a dependent.
    > 3. If we are paying for her college education, is this considered as
    > some kind of gift which is taxed?
    >
    > Thank you for all your help.
    >
    > Kaspa


    Thanks to each and everyone who replied. Very informative! I will
    definitely read the publications that you recommended.
     
    kaspa, Nov 12, 2010
    #8
    1. Advertisements

Want to reply to this thread or ask your own question?

It takes just 2 minutes to sign up (and it's free!). Just click the sign up button to choose a username and then you can ask your own questions on the forum.
Similar Threads
  1. george

    Claiming daughter

    george, Feb 5, 2004, in forum: Tax
    Replies:
    7
    Views:
    390
    A.G. Kalman
    Feb 11, 2004
  2. EJW
    Replies:
    1
    Views:
    251
    Benjamin Yazersky CPA
    Feb 11, 2004
  3. JC
    Replies:
    11
    Views:
    1,205
  4. HW \Skip\ Weldon

    Re: Eligiblity of Roth IRA, regular IRA and spousal IRA

    HW \Skip\ Weldon, Dec 6, 2006, in forum: Financial Planning
    Replies:
    0
    Views:
    246
    HW \Skip\ Weldon
    Dec 6, 2006
  5. Replies:
    0
    Views:
    257
Loading...

Share This Page